TAKEAWAYS

• The proposed regulations provide the initial guidance for new tax credits that go into effect in 2025 for clean electricity facilities using various technologies that achieve net-zero greenhouse gas (GHG) emissions.
• Under the proposed regulations, certain enumerated technologies are deemed to have a GHG emissions rate of not greater than zero.
• Consistent with the relevant statutory provisions, the proposed regulations contemplate the publication of an Annual Table of GHG emissions rates for different technologies and provide guidance for obtaining provision emissions rates for those technologies for which rates cannot be determined from the Annual Table.

On June 3, 2024, the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) published proposed regulations (Proposed Regulations) in the Federal Register [REG-119283-23] which provide initial guidance on the Clean Electricity Production Credit (CEPC) under section 45Y of the Internal Revenue Code (IRC) and the Clean Electricity Investment Credit (CEIC) under section 48E of the IRC (collectively, the Clean Electricity Tax Credits). The CEPC and CEIC were added to the IRC by the Inflation Reduction Act of 2022 (IRA) and apply to qualified facilities and energy property placed in service after December 31, 2024.

Overview of Clean Electricity Tax Credits
The Clean Electricity Tax Credits are technology neutral and provide incentives to any clean energy facility that produces electricity while achieving net-zero greenhouse gas (GHG) emissions. The CEPC is available over a 10-year period based on the kilowatt hours of electricity produced by the clean energy facility and sold to unrelated parties, while the CEIC is a one-time credit based on a percentage of the qualified investment in the clean energy facility. For both the CEPC and CEIC, qualification for the full credit amount generally is conditioned on compliance with prevailing wage and apprenticeship requirements imposed by the IRA. IRC sections 45Y and 48E also include the opportunity to qualify for bonus credits or “adders” in certain circumstances (e.g., for use of domestic content or location of a facility in an energy community).

In certain cases, if a taxpayer places in service a qualified production facility or energy property after December 31, 2024, but construction began before January 1, 2025, the qualified facility or energy property also may be eligible for the Production Tax Credit (PTC) under IRC section 45 or Investment Tax Credit (ITC) under IRC section 48 (collectively, the Renewable Electricity Tax Credits), as currently in effect. The Renewable Electricity Tax Credits are not tied to net-zero GHG emissions rate requirements but are limited to a number of statutorily enumerated clean energy technologies. A taxpayer may only claim one of the four credits for its respective qualified facility or energy property.

The Clean Energy Tax Credits are scheduled to phase out either at the end of 2032 or when national electricity sector GHG emissions fall below 25% of the 2022 level, whichever occurs later. If the 2032 target is met, the CEPCs and CEICs will begin to sunset starting in 2034. Projects starting construction that year will be entitled to 75% of their value, then 50% in 2035, and zero in 2036.

Notable Provisions of the Proposed Regulations
The Proposed Regulations are broad in scope and provide detailed guidance on topics such as determinations of GHG emissions rates. In some respects, however, the Proposed Regulations follow guidance previously issued with respect to the Renewable Electricity Tax Credits. Below is a summary of some key aspects of the Proposed Regulations.

• The Proposed Regulations identify the following technologies that are deemed to have a GHG emissions rate of not greater than zero: wind, solar, geothermal, hydropower, marine and hydrokinetic, nuclear fission and fusion, and certain types of waste energy recovery facilities. Such designation should prove helpful for taxpayers in the relevant industries.

• The IRS will publish an Annual Table, starting after the publication of final Treasury regulations, which will establish the GHG emissions rates for various types of facilities. Taxpayers can use the Annual Table in effect when construction of a facility commences, provided that the facility continues to operate as a type of facility described in such Annual Table. Until the first Annual Table is released, taxpayers can rely on the list in the Proposed Regulations of technologies deemed to have a GHG emissions rate not greater than zero.
• If a facility type is not listed in the Proposed Regulations or the Annual Table, a taxpayer may petition for a Provisional Emissions Rate when filing its federal income tax return for the taxable year in which Clean Electricity Tax Credits are claimed. The petition would include an emissions value obtained from the Department of Energy (DOE) or determined using a life cycle analysis (LCA) model. Such emissions value will be deemed accepted by the IRS, subject to the possibility of review on audit.
• The Proposed Regulations provide separate, detailed rules for determining GHG emissions rates for Combustion-and-Gas (C&G) Facilities and Non-C&GFacilities. A GHG emissions rate for a Non-C&G Facility is determined through a technical and engineering assessment of the fundamental energy transformation into electricity. The assessment must consider all input and output energy carriers and chemical reactions or mechanical processes taking place at the facility in the production of electricity. GHG emissions rates for C&G Facilities are determined by an LCA that takes into account direct emissions, significant indirect emissions in the United States or other countries, emissions associated with market-mediated changes in related commodity markets, emissions associated with feedstock generation or extraction, emissions consequences of increased production of feedstocks, emissions at all stages of fuel and feedstock production and distribution, and emissions associated with distribution, delivery and use of feedstocks to and by a C&G Facility. The Proposed Regulations contemplate that Treasury may designate LCA models that can be used for purposes of determining GHG emissions rates for C&G Facilities that are not described in the Annual Table. Treasury and the IRS indicated in the preamble their intention to provide additional rules and principles addressing what factors must be considered to assess emissions associated with feedstocks used by C&G Facilities to produce electricity for purposes of the Clean Electricity Tax Credits, and also invited comments on the general principles and factors to be considered to estimate net-GHG emissions associated with electricity production by C&G Facilities.
• Any changes to the set of technologies that are designated as zero-GHG emissions, or designation of LCA models that may be used to determine GHG emission rates, must be accompanied by an analysis prepared by one or more of the National Laboratories, in consultation with agency technical experts and other experts.

• Under IRC section 45Y, in calculating the CEPC, taxpayers are allowed to include electricity that is sold, consumed or stored by the taxpayer if the qualified facility has a metering device that is owned and operated by an unrelated person. This represents a departure from the long-time PTC rule that electricity must be sold to unrelated parties in order to be credit-eligible. The Proposed Regulations provide definitions of “metering device” and “unrelated persons,” standards for maintaining such devices, as well as guidance on what, if any, equipment the unrelated person may share with the taxpayer in connection with the metering device.
• A Clean Electricity Tax Credit is not allowed for any facility for which a credit is allowed under IRC sections 45J, 45Q, 45U or 48A, or for which the PTC, ITC or the alternative Clean Electricity Tax Credit is allowed, for the taxable year or any prior taxable year. In applying this anti-stacking rule, the Proposed Regulations define “allowed” to include only credits that taxpayers have claimed on a federal income tax return or federal return, as appropriate, and that the IRS has not challenged in terms of the taxpayer’s eligibility. Thus, mere eligibility for an alternative credit should not be disqualifying.
• Taxpayers who add capacity or a new unit to an existing facility may treat such added capacity or new equipment as a qualified facility, but only to the extent of the increased amount of electricity produced at the facility. While the new unit or added capacity is treated as its own separate qualified facility, taxpayers will need to consider the existing facility, as well as the new qualified facility, when determining eligibility for the “One-Megawatt Exception” from the prevailing wage and apprenticeship requirements. Special rules are provided for decommissioned facilities that have closed but are seeking to restart operations.
• The Proposed Regulations adopt the so-called “80-20 Rule” for determining when a retrofitted facility can be considered newly placed in service for purposes of claiming Clean Electricity Tax Credits. Under the 80-20 Rule, no more than 20% of the value of the retrofitted facility can be attributable to used components.
• The CEIC will be subject to recapture if a qualified facility’s GHG emissions rate exceeds 10 grams of CO₂e per kWh during the five-year recapture period. Taxpayers must make this determination each taxable year and report it to the IRS. A change in the GHG emissions rate in the Annual Table after such qualified facility is placed in service, however, will not result in a recapture event.
• Qualified carbon dioxide, as defined in section 45Q of the IRC, that is captured, disposed of or utilized will be excluded from the GHG emissions rate for both C&G and Non-C&G Facilities. Treasury and the IRS have requested comments on a number of questions relating to this subject.
• Treasury and the IRS reserved for future guidance what was described as complex issues relating to facilities that produce electricity using biogas, renewable natural gas (RNG) or fugitive sources of methane (i.e., methane obtained from coal mine operations). Among the topics to be addressed in such future guidance are the establishment of requirements designed to reduce the risk that entities will deliberately generate additional biogas, for purposes of claiming Clean Electricity Tax Credits, above historic and expected future levels or an equivalent metric (e.g., through the intentional generation of waste). Additionally, for purposes of the Clean Electricity Tax Credits, Treasury and the IRS anticipate that producers using biogas, RNG or fugitive methane will be required to acquire and retire corresponding energy attribute certificates (EACs) through a book-and-claim system that can verify in an electronic tracking system that all applicable requirements are met. Comments have been invited on those topics, as well as a number of other questions raised in the preamble to the Proposed Regulations.

Next Steps
Public hearings on the Proposed Regulations are scheduled to be held on August 12 – 13, 2024. Written or electronic comments in response to the Proposed Regulations and requests to speak at the public hearings must be received no later than August 2, 2024. Treasury plans to carefully review comments in consultation with interagency experts and continue to evaluate how other types of clean energy technologies may qualify for the Clean Electricity Tax Credits. Pillsbury will continue to monitor and provide updates concerning the Clean Electricity Tax Credits and is prepared to support parties interested in submitting comments concerning the Proposed Regulations.

[View source.]